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Higher Operating Margin Boosts Euronet Worldwide's Earnings

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In its third-quarter 2016 report issued on Oct. 20, electronic payments provider Euronet Worldwide, Inc. (NASDAQ: EEFT) posted revenue growth slightly below the pace set in the first two quarters of the year. Yet in comparison, the company achieved a considerably higher operating margin. Let's examine both the revenue moderation and the drivers behind Euronet's margin expansion, beginning with a review of key highlights from the company's filing:

Euronet: The raw numbers

Metric Q3 2016 Actual Q3 2015 Actual Growth (YOY)
Revenue $524 million $481 million 8.9%
Net income attributable to Euronet Worldwide $61 million $31 million 97%
Diluted earnings per share $1.11 $0.57 95%

Data source: Euronet Worldwide, Inc. 8K-filing, Oct. 20, 2016. YOY = year over year.

What happened with Euronet this quarter?

  • Euronet's EFT processing segment recorded brisk revenue growth of 28%, to $152.6 million. EFT processing benefited from a larger ATM network, which has expanded by more than 8,000 ATMs in Europe and India versus the end of Q3 2015.

  • EFT processing will net further top-line gains in the coming quarters. Earlier this month, on Oct.10, Euronet completed the acquisition of U.K. ATM network operator YourCash Europe LTD. With this purchase, Euronet will add 5,000 ATMs across the U.K., Ireland, Belgium, and the Netherlands to its arsenal.

  • Surprisingly, the YourCash ATMs generate less than half the operating margin of Euronet's existing European network. These ATMs will appear on Euronet's financials beginning in the fourth quarter, and management has signaled that it will move quickly to add value to the YourCash transaction stream.
  • Following a trend in recent quarters, Euronet's epay segment experienced a marginal revenue decline of 4%, to $167.2 million. Revenue from epay may remain lackluster for a few quarters as management works to effect a shift from declining mobile airtime top-up services to more lucrative digital services, which include the sale of content and gaming products via retail locations.

  • The company's third segment, money transfer, achieved revenue improvement of 9%, a considerable deceleration from the revenue growth seen in both Q1 2016 (25% increase over the prior year) and Q2 2016 (22% increase over the prior year). While Euronet's RIA subsidiary is still posting double-digit growth through its remittance partnership with Wal-Mart (NYSE: WMT) , the segment's foreign exchange subsidiary, HiFx, was held to single-digit growth during the quarter, as forex trading volumes of the British pound have been subdued following the U.K.'s Brexit vote.

  • Also in money transfer, executives noted that currency subsidiary XE will migrate its processing from a competitor to HiFx's platform in November, which should improve operating margins in the segment.

  • Overall, though Euronet's revenue improvement slowed relative to the first half of the year, operating income margin increased handsomely, by roughly 270 basis points, to 17.3%. This is partly attributable to an annual effect: In the third quarter, peak European tourism brings higher margin traffic and transactions to the company's continental ATM network, pushing EFT processing profits higher.

  • In addition, management cited a focus within epay on transactions with more lucrative margins, if lower volume, during the third quarter, thus benefiting total operating income.

What management had to say

For those following Euronet from quarter to quarter, it's clear that epay remains the segment with the most long-term revenue uncertainty. During Euronet's post-earnings conference call, executives discussed in detail various initiatives to replace mobile airtime top-up transactions with newer services. The following is a description of the current efforts, provided by CEO Mike Brown:

Moving forward

Euronet's fourth quarter will be characterized by operational execution. The company will both absorb its YourCash acquisition and complete the XE processing migration to HiFx. In this workhorse context, executives have targeted fourth-quarter adjusted earnings per share at $1.07, which would translate to a decent 16% leap over Q4 2015. While shareholders shouldn't expect a huge variation from this earnings target, it's conceivable that revenue could resume the faster growth trend seen in the front half of the year, boding well for the coming quarters as we head into 2017.

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Asit Sharma has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Activision Blizzard, Apple, eBay, Netflix, and PayPal Holdings. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. The Motley Fool recommends Euronet Worldwide. Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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